Emerging Asia strong enough to weather global volatility next year: BOT predicts

Bank of Thailand Governor Prasarn Trairatvorakul (L) and Central Bank of Russia Governor Elvira Nabiullina are seated for the an International Monetary and Financial Committee meeting during the 2014 IMF – World Bank Annual Meetings on October 11, 2014 in Washington, DC.

Emerging Asian economies are sturdy enough to weather the expected worsening of global fund and exchange-rate volatility next year as the monetary policies of major economies diverge, the Bank of Thailand said yesterday.

"The fluctuations in global fund flows and exchange rates will naturally and continuously occur. It is not a new phenomenon and the ability to cope with these fluctuations is dependent on how strong each emerging country's economic fundamentals are at the time of volatility," spokesman Chirathep Senivongs Na Ayudhya said.

Russia's possible default is a country-specific event that could trigger a dimming of emerging-market sentiment in the monetary market. Meanwhile the problems in Turkey and Argentina are not caused in the financial sector by non-performing loans but are more related to high current-account and budget deficits, a "twin deficit" situation.

"Emerging Asian economies are relatively strong, even though Malaysia and Indonesia have been affected by the falling oil prices. But looking at the whole picture, most emerging Asian economies are now much less dependent on exports and they are relying more on domestic demand.

"Besides Indonesia, the current-account balances of emerging Asia are mostly in surplus. Their international debts are manageable and their reserves are high," he said.

Russia has been in trouble since 2008 because its economy still largely relies on state agencies instead of the market mechanism, which means that its economy needs structural reform, Chirathep said.

Its existing structural problems coupled with sanctions imposed by advanced economies and tripled with falling oil prices has led it to the current situation of possible default and fluctuations in fund flows, which might cloud emerging-market sentiment.

However, Russia only accounts for 2 per cent of the world economy, so there should be no effect on the growth of global gross domestic product. The calm in economic activities at the end of the year means that the effect of Russia's situation on global fund flows and market sentiment in the monetary market will not be truly seen until the beginning of next year, he said.

Russia only takes 0.5 per cent of Thailand's exports by value.

The central bank also said the recent decisions of the US Federal Reserve and the Bank of Japan were as expected. It is looking for Japan to continue with its quantitative easing programme in the next period since Prime Minister Shinzo Abe was re-elected.

The Fed is expected to raise the policy interest rate next year. However, inflation is still lower than targeted so the Fed can still "wait" and analyse its economic indicators before hiking the rate.

"January is an interesting month, since global funds usually flow back to emerging markets at this time of year but the direction of the US interest rate might cause investors to change their positions in emerging markets," Chirathep said.

"But the economic fundamentals of Asian emerging markets are currently better than emerging markets in other regions."